EXCLUSIVE: Wawa Reveals How to Survive a Recession

The company's prescription for a healthy balance sheet: cut expenses without scaling back on service and quality.

MEDIA, Pa. -- In its 60-year history, the convenience store industry has weathered recessions, regional slow downs and back-to-back big-chain bankruptcies. But few retailers were as well positioned as they could be when the current financial meltdown started.

The management team at Wawa Inc. saw the storm clouds forming, and unlike other industry colleagues, proactively set about preparing for the worst.

"We were aware, as most retailers were in June 2007 that the economy was headed for a downturn," Harry McHugh, Wawa's senior vice president, told CSNews Online. "We did a little research and recognized it wasn't a temporary thing. We've been through this many times before and know we are left to our own devices. We knew what we should do: cut expenses and make sure the balance sheet was in order, and be prudent in investments."

But that was easier said than done. Many retailers make knee-jerk reactions in times of crisis, slashing labor costs or looking for a quick fix.

"No one is really sure how long this recession will last. It could be protracted," McHugh said. "We think it will be more than a year and want to remain flexible."

To do this, the chain curtailed plans for rapid growth and looked for ways to balance its budget without hurting sales. "We certainly don't want to cut customer service," McHugh said. "It's foolish to do that by cutting labor costs. These types of economic downturns are a test of your commitment to customer service and an opportunity to provide a value."

The chain has been long positioned as a value retailer, and it had a low-price strategy on cigarettes and gasoline for years. Despite some temptations to go for the quick buck, it has stuck with its no-fee ATM service.

"People are looking for a value even more now. You need to offer a wide variety of products at a good price -- you can't rely on one trick," McHugh said. "You need to offer many options and a range of products so that you can always make a sufficient gross profit."

When it came to cutting expenses, the Wawa team worked to manage overhead and headcount at corporate headquarters. Planned projects were deferred.

"We are project-rich -- we literally have hundreds of projects [ready to go]," McHugh said. "We have had to prioritize them and be prudent about what we will invest in. No great secret there. It's common sense. But it requires teamwork and communication."

Teamwork doesn't mean everyone involved in making those decisions is happy with them. "If your project is being deferred, you will be howling," he noted.

When considering cuts, Wawa executives had a few criteria to guide them. They didn't cut anything that would degrade stores. They didn't interfere with maintaining facilities and equipment. They would not compromise on quality.

"The stores have to remain world-class," McHugh said. "If people are unhappy with the product, they won't shop at your stores, no matter what your customer service is."

The chain is constantly refurbishing its locations. "We have increased our investments in those areas and are revitalizing at least half the chain in 2009," he said. "Plus, there are key products on the rise, and we can't defer those."

An example: a large investment in frozen cappuccino and smoothie machines. "We will put those in our stores in 2009, because they drive sales and gross profit," McHugh said.

The management team also remained committed to Wawa employees. "You can't just say, 'I'm not offering you benefits now.' If anything, we are going the other way, offering more benefits and tuition refunds and a greater choice of benefits to more customer service staff. We would never skimp on employee education or development. We have also raised our level of pay, but made it more merit-based. When you start exercising common sense, what you cannot compromise on becomes even clearer."

Certain technologies, such as the stores' network infrastructure, have to remain current and reliable. "If you lose your network, you are out of business," McHugh said.

Other big projects or events, though, were put off. "We wanted to add a lot of properties and increase the size of [our] properties, but we are deferring that," the retailer noted. "If the economy was expanding, we could spend that additional money. If we were thinking of replacing the point-of-sale system, we'd defer on that. If we were looking at refurbishing the corporate office or other things that don't affect the customers' experience, we hold off."

Wawa's team gets down to the nitty-gritty when making cuts -- from the number of periodicals management receives at headquarters to travel and meeting expenses and the number of reimbursable miles driven by employees. The annual managers convention, for example, was cut from the budget this year.

"Everyone is trying to pare what they can," McHugh said. "After a while, people start thinking they gave enough, like a blood drive, and then you know, often times, the boss comes in and says, 'No, it's not enough. Roll up your sleeve again.' Until everyone is coming out screaming, saying, 'That's not fair!' Then we know we've done OK."

Still, armed with a good-looking balance sheet, it may be temping to snatch up stores others that are less well-positioned put on the block. "That is something we will always look for, if the opportunity arises,” McHugh said. "We do want to be in the position to exploit those opportunities. We always have our eyes on the horizon."

However, he noted the company is 28 percent employee-owned, and "you never want to put your company or associates at risk."

When making any budgetary decision, the management team considers Wawa's six core values: valuing people, delighting customers, embracing change ("We feel we should be leading change now, not just embracing it," McHugh noted), doing the right thing and doing things right.

"Those values drive our spending," he said. "You can't compromise your values with short-term decisions," he said. "You need to be built to last. We have a passion for winning here. We love to compete. It's not all Kumbaya."